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WORKING CAPITAL MANAGEMENT

WITH SPECIAL REFERENCETO NALCO

Dissertation Report Submitted to

P.G Dept. of Commerce

In partial fulfillment of the Course in

Master in commerce


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C E R T I F I C A T E

This is to certify that the Project Report Titled A Study on Working Capital

Management at National Aluminium Company Limited, Mines & Refinery Complex Damanjodi is a

bonafide work done by Mr. Sanjib Panda under my direct guidance & supervision.During the study, he

has been found to be sincere,dedicated & inquisitive.

I wish him all success.

Dr. Prabodh Ku. Hota

P.G Dept. Of Commerce

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DECLARATION

I hereby declare that this project titled WORKING CAPITAL MANAGEMENT OF NALCO,

Damanjodi, Orissa is submitted by me to P.G Dept. Of Commerce, Utkal University in partial

fulfillment for the award of MANAGEMENT IN COMMERCE, is of my own and it is not submitted to

any other Institute, University or has been published any time before.

Date: 05-05-2011

Place: Bhubaneswar Mr. Sanjib Panda

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ACKNOWLEDGEMENT

I take this opportunity to place on record my sincere gratitude for submitting this report to P.G

Dept. Of Commerce, Utkal University, Bhubaneswar to meet the requirement of Master in Commerce.

I would like to sincerely express my deep sense of gratitude to my guide Dr.Prabodh Ku. Hota,

Utkal University, Bhubaneswar for his guidance in pursuing my project successfully.

I am very much grateful to my Parents and all friends for their constant help and encouragement

to complete this project successfully.

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CONTENTS

CHAPTER NO. SUBJECT

CHAPTER-1 COMPANY PROFILE

-Origin of Nalco

-Mission & Vision

-Objectives

-Quality Policy

-Various Units of Nalco

-SWOT Analysis

-Nature of Activities

-Organizational & Departmental Chart

-Functions of Finance Department

-Description of various Departments

-Financing Working Capital by Nalco

CHAPTER-2 ACHIEVEMENTS, GROWTH & EXPANTION

CHAPTER-3 A. LITERATURE REVIEW

-Working Capital Management

-Classification of Working Capital

-Operating Cycle

-Necessity of adequate amount of Working Capital

-Factors that influence the need Working Capital

-Sources of Working Capital

-Importance of Working Capital Management

B. -Objective of the study

-Significance of Working capital at Nalco

-Expected contribution from the study

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-Tools and Techniques used for collection of data

-Limitation of study

CHAPTER-4 DATA ANALYSIS AND INTERPRETATION

-Analysis of data of 10 years

-Analysis of Working Capital using

Funds flow statement

-Analysis of Working Capital using

Ratios

-Analysis of Cash flow statement

CHAPTER-5 FINDING, SUGGESTION & CONCLUSION

-Findings

-Suggestion

-Conclusion

-Bibliography

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CHAPTER-I

COMPANY PROFILE

Vision

To be a company of global repute in Aluminium Sector.

Mission

To achieve growth in business with global competitive edge providing satisfaction

to the customers, employees, shareholders and community of large.

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ORIGIN OF NALCO

In January 1980 the visit of the President of France to India saw the signing of a memorandum of

understanding (MOU)for initiating technical discussion on collaboration and financing of one pf the

largest integrated alumina and Aluminium project in the world. in November 1980 Govt. of Orissa

chastened and registered as NALCO on the 7th of January 1981.

Then prime minister of India, Smt. Indira Gandhi laid the foundation stone of Nalco at

Damanjodi on 29th march 1981.Thus began a new chapter in the Indian history and Aluminium

industry with Nalco.

Large reserves of Bauxite Ore in the east coast and the preliminary project

work done by the Bharat Aluminium company limited are the two factors that emphasized the

Indian government in 1981 to set up NALCO .the company was one of the worlds largest multi-

locational integrated Aluminium project with its own captive power plant and port facilities. Basically

multi unit and multi locational, Nalco plants are spread over three places in Orissa and Andhra Pradesh

with marketing offices all over the country.

Built under most difficult logistic of project management, this integrated gigantic Aluminium complex

went on stream in 1987,on schedule and with budgeted cost.

NALCO was started with a capital cost of Rs.2,408 crores , out of which 1,119 crores equivalent

of euro dollar was financed by consortium of international banks and balance of Rs.1,289 crores was

financed through equity from government of India.

UNIT-WISE CAPITAL COST

Bauxite mines 88 crores.

Aluminium refinery 754 crores.

Smelter plant 723 crores

Captive power plant 812 crores.

Port facilities 31 crores.

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To provide value of money to all shareholders.

VARIOUS UNITS OF NALCO

Bauxite Mines:-

On Panchpatmali hills of Koraput district in Orissa, a fully mechanized opencast mine of 4.8

million TPA capacities is in operation since November, 1985, serving feedstock to Alumina Refinery

at Damanjodi located on the foothills. Presently, the capacity is being expanded to 6.3 million TPA.

Features-

Area of deposit- 16 sq.km.

Resource - 310 million tones.

Ore quality Alumina 45%, silica 2%.

Mineralogy over 90% gibbsite.

Over burden 3 meters (average).

Ore thickness-14 meters (average)

Transport 14.6 km long single flight multi

curve cable but conveyer of 1800 Tph.

Alumina Refinery

The 15,75,000 TPA Alumina Refinery, having three parallel streams of equal capacity, is

located in the picturesque valley of Damanjodi in Koraput district. In operation since September 1986,

the refinery is designed to provide Alumina to the companys smelter at Angul. Export the balance

Alumina to overseas markets through Visakhapatnam Port. Presently, the capacity is being expanded to

2100000 tpa.

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Features-

Atmospheric pressure digestion process.

Pre- desilication and inter-stage cooling for

higher productivity.

Energy efficient fluidized bed calciners.

Co-generation of 3*18.5 MW power by use of

backpressure turbine in steam generation plant.

Advanced red mud disposal system.

Captive Power Plant-

Close to the Aluminium smelter at Angul, a Captive Power Plant of 960 MW capacity, comprising

8*120 MW clusters, has been established for firm supply of power to the Smelter. Presently, the

capacity is being expanded to 1200 MW.

Features-

Microprocessor based burner management system for optimum thermal efficiency.

Computer controlled data acquisition system for on-line monitoring.

Automatic turbine run-up system specially designed barrel type high pressure

turbine.

Electrostatic precipitators with advanced intelligent controllers.

Wet disposal of ash.

The water for the plant is drawn from River Brahmani through o 7km long double circuit

pipeline. The coal demand is met from a mine of 3.5 million tpa capacity opened up for Nalco at

Bharatpur in Talcher by Mahanadi Coalfields Limited. The Power Plant is inter-connected with the

State Grid.

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Aluminium Smelter-

The 3,45,000 TPA capacity Aluminium Smelter is located at Angul in Orissa. Based on energy

efficient state-of the art technology of smelting and pollution control, the smelter plant is in operation

since early 1987. Presently, the capacity is being explanted to 460,000 tpa.

Features:-

Advanced 180 KA cell technologies.

Microprocessor based pot regulation system.

Fume treatment plant with dryscrubbing system for pollution control and fluoride salt recovery.

Integrated facility for manufacturing carbon anodes, bus bars, anode stems, etc.

Port facilities:-

Located on northern Arm of the Inner Harbor of Visakhapatnam port on the Bay of Bengal.

Features:-

Import of raw materials.

Export of finished goods.

SWOT ANALYSIS OF NALCO

Before analyzing position of NALCO, it is pertinent to look at companys internal strengths,

weaknesses, external opportunities available and threats from environment. SWOT analysis gives a fair

picture about companys performance. The SWOT analysis has been done before analyzing the

financial restructuring of NALCO.

The following assumptions have been made for SWOT analysis:

Present economic policy of economic liberalization undertaken by Government of India will

continue.

Political scenario in and around India and Asia will remain stable.

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World aluminium market will remain buoyant in the coming years.

Company will continue to produce high quality aluminium and Industrial Relation in the

company will remain healthy in the forthcoming years.

STRENGTHS:

Sound technology base with latest state of the art technology for production of Aluminium and

Alumina.

Consistent good financial performance.

Star trading house and the price are linked with LME.

NALCO has got ISO-9000 certification for all its production units.

Low cost of production and high quality products.

Leader in domestic primary aluminium market.

Very high customer confidence.

Familiar with export market.

Huge reserve and surplus in a very short period of time.

Experience built over the years in producing aluminium.

WEAKNESS:-

Do not have experience of marketing in the highly competitive down stream segments of

aluminium.

Being a public sector unit, many a time policy making is influenced by government and

bureaucrats.

Poor distribution logistics. Being the leader in primary aluminium market, NALCO has never

felt the need for setting up channels of distribution, which is now absolutely essential for

downstream products.

Limited corporate autonomy due to interference of government.

Lack of promotional effort for marketing.

Inadequate R&D

Cost over run anticipated if there would be delay in implementation of expansion project,

which may adversely affect the companys future.

Poor logistic control and supply chain management.

OPPORTUNITIES:-

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Expanding global market for aluminium in all segments.

Scope for raising fund from external sources is bright for NALCO due to impressive bottom

line.

There is scope for JV and direct selling to the consumers for the downstream value added

products.

Scope for backward and forward integration.

THREATS:-

Competition from substitute materials.

NALCO has always operated in suppliers market place. Being the leader in an oligopolistic

market, the company may find it difficult to market new products where the existing small

companies have already established themselves. As such there is cut throat competition in the

secondary value added product market.

Fluctuation in foreign exchange may adversely affect its expansion & diversification plans.

Proposed expansion by the competitors may affect the market position.

OBJECTIVES-

To maximize capital utilization.

To optimize operational efficiency and productivity.

To maintain highest international standards of excellence in product quality, cost efficiency and

customer service.

To provide steady growth in business by technology up gradation, expansion and diversification.

To have a global presence and earn foreign exchange.

To maintain leadership in domestic market.

To instill financial discipline at all levels for achieving cost and budgetary controls, optimize

utilisation of working capital and effective cash flow management.

To maximize return on investment.

To develop a strong R&D base and increase business development activities.

To promote a result oriented organizational ethos and work culture that empowers employees and

helps realization of individual and organisational goals.

To maximize internal customer satisfaction.

To foster high standards of health, safety and environment friendly products.

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To participate in peripheral development of the area.

NATURE OF ACTIVITIES-

NALCO deals with

Mining of bauxite.

Manufacturing of Alumina.

Manufacturing of aluminium.

ORGANISAITON CHART OF NALCO ( M&R COMPLEX)

ED(M&R) Overall incharge of M&R Complex and all Functional level GMs are

reporting

GM(AR) /

GM(O&M)

Incharge of Alumina Plant operation & maintenance

GM(Mines) Incharge of Mines operation & maintenance

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F U N C T I

H O D

G M O &

G M ( A R

F U N C T I

H O D

G M ( M I N

F U N C T I

H O D

G M ( H &

F U N C T I

H O D

G M ( M A T

F U N C T I

H O D

G M ( F I N A

E D ( M &


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GM(H&A) Incharge of HRD & Admn. of M&R Complex

GM(MATLS.) Incharge of Purchase & stores Functions of M&R Complex

GM(FINANCE) Incharge of Finance & Accounts of M&R Complex

FUNCTIONAL

HEAD OF

DEPARTMENT

Incharge for respective area of operation and i.e. Production,

Mechanical, Electrical, Steam Generation Plant, Electronic &

Instrumentation, Civil, Purchase, Stores, Finance, Human Resource

Development, Administration, Horticulture, Training, Peripheral

Development.

CHART OF FINANCE DEPARTMENT

GM(FINANCE) :: Overall in charge of Finance & Accounts Section of M&R

Complex.

CHIEF MANAGERS :: Overall in charge of various functions of finance and accounts

like Central Accounts, Costing, Budgeting, Management

Information System, Suppliers Bills, Contractors Bills,

Establishment Section, Taxation, Price Stores Ledger, Cash &

Bank, Sales, Time Office, Audit etc.

Managers / ::

Dy. Managers /

Asst. Managers / Jr.Managers

Directly in charge of individual section works and they are

assisted by sub-ordinate staff to carry out day to day works.

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M A N A G E R ( F D Y . M A N A G E

J R . M A N A G E R J R . M A N A G E R

J R . M A N A G E R

C H I E F M A N A G E R ( F I

M A N A G E R ( F D Y . M A N A G E R

A S S T . M A N A G J R . M A N A G E R

D Y . M A N A G E R

C H I E F M A N A G E R ( F I M A N A G E R ( F I N A N C

G E N E R A L M A N A G E R


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DESCRIPTION OF VARIOUS DEPARTMENTS-

(1) Administration Department-

This department is responsible for the coordination between the M&R complex at Damanjodi with

the corporate office at Bhubaneswar. The department is also responsible for the coordination of other

departments in the complex and acts as a channel through which matters relating to the working and

other activities of the organization.

(2) Human Resourse Department-

Headed by the General Manager (training), the center caters to the requirements of the employees

of Mines and Alumina Refinery complex.

The complex imparts special training viz.

Technology of aluminium making process. Mechanical &Electrical and Aluminium engineering.

Mining and geology.

The entire gamut of the Human Resource Management activities in NALCO is guided by the

following HRM philosophy laid down and well circulated by the company;-

To attract competent personnel with growth potential and develop their skills and capabilities in a

congenial work and social environment through opportunities for training, recognition, career

advancement and other incentives.

To develop and nurture favorable attitude among the employees and to obtain their best contributions

to the organization by providing stable employment, safe working condition, job satisfaction, quick

redressal of grievances and with good pay and welfare amenities commensurate with the Companys

capacity to spend and the Governments guidelines.

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To foster a sense of belongingness among all sections of employees through closer association of

employees with the management and by encouraging healthy trade unions.

(3) Training and Development-

The following aspects concerning Training & Development are directly derived from the

corporate objectives of NALCO- thus emphasizing the importance of T&D function in the organisational

perspective:

To upgrade the skills, abilities, capacities of workers to handle their respective works

more effectively.

To design and implement training Programmes at all levels to develop the employees

skills and thus maximise job satisfaction and give opportunities for career growth.

To help the workers to use more effectively the company exists resources.

To be able to move toward realizing the organization need for succession, promotion and

better performance.

To develop workers through problems of business by using experience on the jobs

through the powerful instruction of learning and thereby improve performance of the

workers as well as operation of the business

In case of management development, NALCO emphasizes on what is known as Action Learning

Process in contemporary management practices. NALCO has also accepted, as an article of faith, to

upgrade the quality of available human resources among those directly affected due to setting up of the

project (land displaced) and make them suitable for direct employment in NALCO.

(4) Finance department-

This department is headed by the General Manager (finance). The department looks after the

financial requirements of the other departments and allots the finance to them respectively. It coordinates

the financial activities of the M&R complex with the corporate office which allots the finance for the

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activities in this segment. It has to prepare reports regarding the expenditure in details and submit it to

the corporate office at Bhubaneswar. Before the amount of money is allocated to each department, every

department has to submit a report mentioning the financial requirements and then according to the

feasibility the finance is allotted. The departments have to keep the finance department updated with the

various transactions by the means of monthly statements.

(5) Environment and Safety Department

This department is in charge of the following activities:

Safety management

Environment management

Pollution monitoring and control

Liasioning with statutory bodies

The company follows the policy that

a) Waste is money loss

It believes that environment benefits often secure financial benefits at least cost.It has achieved

success in the environment management through achieving the ISO-14001 standards. Necessary

improvements are done each year to take care that the neighboring environment is protected from the

companys waste. The company also undertakes the afforestation campaign on the areas where the

forests had to be destroyed for the procurement of bauxite. Compliance report to inspector of Factories &

Boilers, Sunabeda and State Pollution Control Board are also been constantly coordinated. Necessary

Liasioning has also been extended during factory visits of all statutory officials.

A well-equipped laboratory is available to carry out all types of pollution monitoring analysis

and Central Pollution Control Board recognizes it. 4 nos. of earthen dams have been constructed for

reducing the ash slurry concentration in the storm water drain, in case of accidents leakage of ash slurry

pipelines. Pollution aspects are also discussed everyday in the morning meetings. Disposal of other solid

wastes lime grit, dry mud, etc. are monitored strictly. A close observation is made on the Ash pond, Red

mud pond and effluent treatment and disposal system.

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(6) Research & Development Department-

This department is managed by a group of 28 efficient researchers. It undertakes a Capital

expenditure of 32 lakh yearly and 20 lakh on the miscellaneous activities. This department on a regular

basis keeps the company updated with the environmental friendly products and procedures. The latest

development in this field is the Zeolite A project which is a environmental friendly material.

(7) Quality Control Department-

The company has always emphasized on the quality norms. It is a strict follower of the Total

Quality Management. As much as 60 lacs capital expenditure and 55 lacs of revenue expenditure is made

under this department. The department is equipped with 50 employees who undertake the quality control

objective efficiently. The company has always laid down stress on the quality control. The refinery

sector has been re-certified to ISO-9000 or a period of three years from 2001.

Quality Circle movement has been receiving due attention and thrust, with more and more

employees exposed to the Quality Circle philosophy and methodology. The company has also won a no.

of laurels at national and international competitions.

(8) Civil and Maintenance Department-

This department takes care of the maintenance of the roads, township buildings, clubs, schools

and other infrastructure of the company. The parks and water supply is also covered under this

department. The department undertakes a yearly expenditure of 1.30 lacs on an average.

(9) Vigilance Department-

The vigilance department of the company while keeping pace with the awareness regarding

menacing effect of corruption in the society took various measures in combating corruption. Action are

taken to streamline the system to have transparency and honesty in the decision making process.

Enforcing preventive vigilance drive, a number of surprise checks are conducted at different sites

keeping eye on corruption prone areas. Training programmes on vigilance awareness among the

employees are undertaken each year. Vigilance week i.e, from the 31st October to 4th November is

celebrated in all the units to update the employees on the new techniques facilitating vigilance.

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FUNCTIONS OF FINANCE DEPARTMENT OF NALCO

The section in finance department consists of Cash Management, Tenders and Contracts, Internal Audit,

Inventory Management, Raw Materials Section, Establishment Section, Bill Section.

(1) Cash Management-

Cash is the most liquid asset and is of the vital importance in day-to-day operation of business

firms. While the corporate asset held in the form of cash is very small, often between 1 to 3% its efficient

management is crucial to the solvency of business because in a very important sense cash is the focal

point of funds flow in a business. It is referred to as the lifeblood of the business firm.

There are two primary reasons to hold cash-

(a) To meet the needs of day-to-day transactions.

(b) To protect the firm against uncertainties characterizing its cash flow.

While cash serves these functions, it is an ideal resourse, which has a cost. There are basically

two types of cash report for maintaining the Cash Management.

(a) The daily Cash Report

(b) The Monthly Cash Report

NALCO is following centralized banking system in which there is a centralized bank at

Bhubaneswar. Each unit has the State Bank of India Branches at their respective places. The net effect of

payments and receipts through banks (either debit balance or credit balance) are transferred to centralize

State Bank at Bhubaneswar on day-to-day basis. All the cheques issued by the units has to be honoured

by the SBI Bank because NALCO maintain current account at SBI branches at NALCO unit.

(2) Tenders and Contracts-

At times situation may arise when the company requires the assistance of outside agencies to

perform certain task for which it may have neither the technical competence nor the requisite skilled in

the plant to ensure their smooth functioning and longevity, carrying out civil works disposal of by

products of generated during the production process in the plant etc. Considering the vast amount of

money spent on these jobs and to ensure quality work the company through the tender and contract

department undertakes a rigorous task to ascertain technical and solvency of various parties willing to

carry out the job before awarding the contract to any of them.

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So many tenders are submitted in the tenders & contracts department. After negotiation with various

parties tender committee awards the contracts to the contractor with the lowest price comparable to the

estimated cost having satisfactory technical competency. Thereafter tender committee submits entire

detail of the contract along with agreed upon price; justifying any changes from the approximate project

cost previously submitted by the user department and concurred by finance department for approval.

Then an agreement is signed by both the parties i.e. contractors and the User Department. Both the

parties must be satisfied with the agreement.

Re-ordering level-

When the quantity of materials reaches a certain figure then fresh order is sent to get material again. The

order is sent before the materials reach maximum stock level. Re-ordering level is fixed between

minimum level and maximum level. The rate of consumption, number of days required to replenish the

stocks and maximum quantity of materials on any day are taken into account while fixing re-ordering

level.

Re-ordering Level = Maximum Consumption* Maximum re-ordered Period.

a) Maximum level-

it is the quantity of materials beyond which a company should not exceed its stock. If the quantity

exceeds maximum level limit then it will be overstocking. A company should avoid overstocking

because it will result in high materials cost. Cover stocking mean blocking of more working capital,

more space for storing the materials, more wastages of materials and more charges of losses from

obsolescence.

Maximum stock level = Re-ordering Level + Re-ordering Quantity-(minimum Consumption*

Minimum Re-ordering Period)

(3) Internal Audit Section-

As required under the provisions of the Companies Act-1956, the statutory Auditors of the

company who are appointed by the Government of India, shall have to comment upon the adequacy of

Internal Control and Internal Audit in the company. Accordingly the Internal Audit Department has

been created in NALCO headed by General manager (finance) In-Charge of Audit and Accounts at

Corporate Office with supporting Internal Audit cells at S&P complex at Angul and M&R complex at

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Damanjodi. The nature of Internal Audit has been defined by the Institute of Internal Auditors as an

Independent appraisal activity within an organization for the review of operations as a service to the

management. It is a managerial control, which functions by measuring and evaluating the effectiveness

of other departments. An internal audit technique is to understand and study the organization plans,

procedures and objectives. Internal auditor should bring in the ability to analyze, compare and evaluate

the operations.

(4) Bill Section-

The indenting department are in need of some items like tools, papers consumables etc these

departments will raise an indent according to their requirements. That indent will be concurred by

finance department and approved by the competent authority. Once the indent is von concurred the

purchase department place a purchase order containing the following: -

Name of the Supplier

Description of the item with material code

Unit of measurement

Quantity required

Rate per unit

Taxes and Duties, if any and also discount

Authorized Transporter

Date of Delivery

Payment Terms

(5) Establishment Section-

It deals mainly with the employees salary, provident fund, traveling allowance, house building

loans, vehicle loans, medical facilities, pension scheme etc. The salary slip for each employee is prepared

every month. The salary month in NALCO, Damanjodi is from 16th of previous month to 15th of present

month.

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(6) Raw Material Section:-

The main Raw Materials are Bauxite, Caustic soda, Lime, Filter Cloth, Wheat Bran, CGM

(Crystal Growth Modifier), Cytec, etc. Some of the raw materials are available locally while others are

imported. The imported raw materials procurements are done from corporate office centrally and

concerned debit advice is passed to the respective sites.

(7) Inventory Management-

Inventory generally represents a very significant proportion of total assets. Inventory consisting of

raw materials, work-in-process and finished goods. Hence the importance of inventory management

can not be over emphasized.

i)Need for Inventory:

There are generally two types of inventory

1. Process of Movement Inventory

2. Organization Inventory

Process or Movement inventories are required because it takes time to complete process /operation and

to move product from one stage to another. The quantity of such inventories would be = (Avg. out of

process x time required for the process)

for example:- If the average output of a process is 500 units per day and process time is 5 days, the

average process inventory would be 2500 units. If the sales at the ware house are 100 units a week,

and the transit time requires to ship the goods from the plant to ware house is 3 weeks, the average

movement inventory would be 300 units.

Organization Inventory are maintained to wider the latitude is planning and scheduling successive

operation. Raw material inventory enables a firm to decouple its purchasing and production activities

to some extent. It provides flexibility ion purchasing and production. The firm can wait fro an

opportune buying movement without affecting its production schedule. Like the production schedule

need not be influenced by the purchasing activity.

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In process inventory: provides flexibility in production scheduling so that an efficient schedule and

high utilization of capacity may be attained. Without In process Inventory a bottle neck at any

stage in the production process renders idle machines facilities at subsequent stages. This results in

delay and idle facilities.

Finished goods inventory enables a firm to decouple its production programme and marking

activities so that desirable result can be achieved on both the fronts. If adequate finished goods

inventory is available the marketing department can meet the needs of customers promptly,

irrespective of quantity and composition of goods flowing out of the production line currently. By the

same taken the value and composition of current out put from the production line may be determined

some what independently of the volume and the composition of the current off take in the market.

(ii) Inventory Control Systems:-

A proper inventory control not only serves the acute problem of liquidity but also increase profits and

causes substantial reduction in the working capital of the concern.

I. Lead time

A purchasing company requires some time to process the order and time is also require or the

supplier to execute the order. The time taken in processing the order and then executing it is known

as lead time. It is essential to maintain some inventory during the period.

II. Rate of Consumption

It is the average consumption of materials in the company. The rate of consumption will be decided

on the basis of past experience and production plans.

III.Nature of Material

The nature of material also affects the minimum level. If a material is required only against special

orders of the customer then minimum stock will not be required for such materials.

Minimum Stock Level = Re-Ordering Level (Normal Consumption x Normal Reorder Period)

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In any scheme of inventory control, following things have to be studied.

1. Stock Levels

2. Determination of safety stock

3. System of Ordering for inventory

4. Preparation of Inventory reports.

1) Stock Level :

Carrying of too much and too little of inventories is detrimental to the company. If the inventory

level is too little, the company will face frequent stock-outs involving heavy ordering cost and if the

inventory level is too high. It will be un-necessary tie-up of capital. Therefore, an efficient inventory

management requires that a company should maintain an optimum level of inventory where

inventory costs are the maximum and at the same time there is no stock-out, which may result in loss

of sale on stoppage of production. The various stock levels maintained here are discussed below:-

a)Minimum Levels

This represents the quantity, which must be maintained in hard at all times.

If stocks are less than the minimum level then the work will stop due to shortage of materials.

b) Re-Ordering Level

When the quantity of materials reaches a certain figure then fresh order is sent to get materials

again. The order is sent before the materials reach minimum stock level. Re-Ordering level is fixed

between minimum level and maximum level. The rate of consumption, number of days required to

replenish the stocks and maximum quantity of materials on any day are taken into account while

fixing e-ordering level.

Re-ordering Level= maximum Consumption x Maximum Re-Ordered Period.

c) Maximum Level

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It is the quantity of materials beyond which a company should not exceed its stocks. If the quantity

exceeds maximum level limit then it will be overstocking. A company should avoid overstocking

because it will result in

high materials cost. cover stocking will mean blocking of more working capital, more space for

storing the materials, more wastages of materials and more charges of losses from obsolescence.

Maximum stock level = Re-Ordering Level + Re-Ordering Quantity (Minimum Consumption

x Minimum Re-Ordering Period)

d)Danger Level

It is the level beyond which materials should not fall in any case. If danger level arises then

immediate steps should be taken to replenish the stocks even if more costs is incurred in arrangingthe materials. If materials are not arranged immediately there is a possibility of stoppage of work.

Danger Level = Average Consumption x Maximum re-order period for emergency

purchases.

TOOLS AND TECHNIQUES OF INVENTORY MANAGEMENT:

1) ABC analysis

This is based on consumption. The materials are divided into a number of categories for adopting

selective approach for material control. It is generally seen that in manufacturing concerns, a small

percentage of items contribute a large percentage of value of consumption and a large percentage of

items of materials contribute a small;; percentage of value. Past experience has shown that almost

10% of the items contribute to 70% of value consumption and this category is called A Category.

About 20% of the items contribute to 20% of value of consumption and this is known as category

B materials. Category C covers about 70% of items of materials which contribute only 10% of

value of consumption.

CLASS NO OF ITEMS (%) VALUE OF ITEMS (%)

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A 10 70

B 20 20

C 70 10

ABC Analysis helps to concentrate more efforts on category. A since greatest monetary advantage will

come by controlling these items. An attention should be paid in estimating requirements, purchasing,

maintaining safety stocks and properly storing of A category materials. These items are kept under s

constancy reviews so that a substantial material cost may be controlled. The Control of C items may be

relaxed and these stocks may be purchased for the year. A little more attention should be given towards

B category items and their purchase should be undertaken at quarterly or half yearly intervals.

2) XYZ Analysis:

This is based on inventory and all the calculations and making categories are same that of ABC

Analysis.

X= 70% of Inventory

Y= 20% of Inventory

Z= 10% of Inventory

3) FSN Analysis:

F stands for fast moving items which includes items having 3 or more times movement in a year.

S stand s for slow Moving items which includes items having less than 3 times movement since 5

years.

N stands for Non-Moving items which includes items

I) Not moved since 5 Years

II) Received before 5 years

It mainly includes insurance items.

4) Perpetual Inventory:

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NALCO follows the perpetual inventory system which is a system of maintaining bin cards and

stores ledgers along with continuous stock verification. This is a method of ascertaining balance after

every issue and

receipts of materials through stock records to facilitate regular checking and to avoid closing down

for stock taking.

In order to ensure accuracy of perpetual inventory record NALCO checks the physical stock by a

programme of continuous stock taking. Any difference noted between the physical stocks and the

stock records are investigated and rectification made then and there. Perpetual inventory system is

intended as aid to material control because the balance of stock shown by bin cards or the stores

ledger should agree with the balance ascertained by physical checking. If the physical verificationreveals that the physical balance is more than the balance shown by the bin card or the stores ledge5

a debit mote is prepared and stock records are adjusted accordingly. Similarly if there is a shortage of

a stock credit note is prepared and stock records are adjusted accordingly. Similarly if there is a

shortage of stock credit note is prepared and stock records are adjusted accordingly so that they

shows the actual balance.

A stock adjustment account is prepared and debited with shortage of stock and credited with surplus.

At the end of the year the balance of the adjustment account is transferred to P/L account.

Advantages: - the following are the advantages perpetual inventory systems.

A) It obviates the necessity for the physical checking of all items of stores at the end of the year and

there by avoids dislocation of production.

B) A detailed and more reliable check on the store is obtained.

C) A system, of internal check remains in operation all the times because bin cards and the stores

ledger acts as a cross check on each other.

D) Errors and shortages of stock are readily discovered and efforts are made to avoid the shortages

of stock in the future.

E) The capital investments in stores are kept under control because actual stock can be compared

with maximum and minimum levels.

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ECONOMIC ORDER QUANTITY (EOQ)

A decision about how much to order has a great significance in inventory management. The quantity

to be purchased should neither be small nor big because costs of buying and carrying materials are

very high. Economic Order Quantity is the size of the lot to be purchased which is economically

viable. This is the quantity of materials which can be purchased at minimum costs. Generally

economic order quantity.

Assumptions of EOQ:

While calculating EOQ the following assumptions are made:

1. The supply of goods is satisfactory. The goods can be purchased whenever these are needed.

2. The quantity to be purchased by the concern is certain.

3. The prices of goods are stable. It results to stabilize carrying costs.

When the above-mentioned conditions are satisfied, economic order quantity can be calculated with

the help of the following formula.

EOQ = 2 AS / I

Where, A = Annual consumption in Rupees,

S = Cost of placing an order,

I = Inventory carrying cost of one unit.

Method of Valuation of Materials:-

The value of materials have a direct bearing on the income of a concern, so it is necessary that a

method of pricing materials should be such that it gives a realistic value of stocks. The traditional

method of valuing materials Cost price or market price whichever is lee is no longer the only

method. Different and it leaves a scope for window dressing. If management is interested to show

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more profits then it can choose such a method, which will show more stock or vice-versa. To

safeguard public interest the Government of India has institute statutory controls to prevent frequent

charge of materials valuation methods. A concern will have to use a particulars valuation method for

at least 3 years and the Board therefore must approve any changes.

INVENTORY CONTROL

(Rs. In Crores)

PARTICULARS 05 06 06 - 07 07 -08 08-09

INVENTORY

Raw Material 56.17 50.48 82.45 65.59

Stores & Spares 260.12 241.03 247.94 268.66

Finished Goods and

Work-in-Process 175.4 235.35 246.60 266.93

491.70 526.86 576.99 601.18

NALCO has adopted the weighted average method for valuation of its materials.

Weighted average method: In this method the total number of items in stock divides the total cost

of all the materials. The price calculated in this way will be used for issue of materials up to the time

a fresh purchase has not been made. After a fresh purchase, the quantity will be added to the earlier

balance quantity and material cost will added to the earlier cost. A fresh price is calculated by

dividing the changed total cost by the number of units in stock after the purchase. A new price is

calculated whenever a fresh purchase is made.

FINANCING OF WORKING CAPITAL BY NALCO

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The working capital in NALCO is mainly finance by State Bank of India. To ensure its equitable

distribution in the right channel, bank credit has been a subject matter of regulation and control.

The bank is mainly following the Tandon Committee Recommendations regarding the lending

norms, which read as follows:

The Tandon group has identified the working capital gap that is the borrowers requirement

of funds to carry current assets less those financed out of his other current liabilities. This gap

could be bridged partly from kits own funds and long term borrowing and partly by bank

borrowing. The maximum permissible limit of bank borrowing could be worked out in three

ways.

METHOD I

The borrowers will have to contribute a minimum of 25% of the working capital from long term

funds i.e. own funds and term borrowing. This will give a minimum current ratio of 1:1.

METHODII

The borrower will have to provide a minimum of 25% of total current assets from long funds and

this will give a ratio of at least 1:3:1.

METHODIII

The borrower contribution from long-term funds will be too the extent of entire core current

assets and a minimum of 25% of the balance of the current assets. The term core current assets

refer absolute minimum level of investment in all current assets which is required at all time to

carry out minimum level of business activities.

For NALCO,SBI follows the 2nd method of lending

CHAPTER-II

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ACHIEVEMENTS, GROWTH & EXPANSION

ACHIEVEMENTS OF THE COMPANY

Mines Safety Award in 1988

Best Eco Friendly Award for the year 1994-95 to the mines and refinery complex by the state

of Orissa safety award committee

Indira Priyadarsini Vrikshvarnitra Award 1994 from MOFF, Govt of Indira to the company

for eco friendliness.

FICCI environment award for Environmental Conservation 1996-1997.

WEC-HE-IAENP Environmental Award for contributing towards environmental protection

around Nalco.

Gem-Granite Environment Award 1997-98 by FIMIND.

Pollution control excellence award by the state of Orissa pollution control board.

Special Commendation Award under golden peacock environment management award.

1998 scheme by world environment foundation

In 2007 Nalco comes under NAVARATNA company

NALCO is one of the Indian companies which have figured in Forbes global 2000 list.

EXPANSION AND GROWTH

After establishing itself strongly as the industry leader, NALCO has gone ahead with its ambitious

expansion programme involving an investment of Rs 3900 crores.

NALCO has already completed expansion of its Mines capacity from 24lacs tonne to 48 lacs tonne

and expansion of Alumina capacity from 8 lacs tones to 15.75 lacs tones. Similarly, the smelter

capacity is being expanded from 230000 tonne to 345000 tonne and Power plant capacity from 720

MW to 960 MW.

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Besides, the company is implementing a number of downstream. The year 1986-87 projects like

special grade Alumina, Zeolite and gallium. The company has acquired RS 356 crore IAPL to

produce 50000 TPA rolled products.

NALCO is also exploring possibilities of joint ventures in gulf countries, was a period of

commissioning and trial production.

CHAPTER-III

LITERATURE REVIEW

WORKING CAPITAL MANAGEMENT

Working capital management has significant in a financial management due to the fact it plays a

pivotal role in keeping the wheels of a business enterprises running. In common parlance the

management of current assets is called the Working Capital management. In any business firm

whether it is trading business or manufacturing business, they need some asset, in terms of

money. As we know that money is the life blood of any business. Shortage of funds for working

capital has caused many businesses to fail and in many cases has retarded their growth. Lack of

efficient and effective utilization of working capital leads to earn low rate of return on capital

employed or even compel sustain losses. The need for skill working capital management has

become greater in recent years. These assets may be for short term or temporary purpose or

long-term purposes. Long term funds may require for many purposes like acquisition of fixed

asset, diversification and expansion of business on modernization of plants and machinery and

research and development.

But funds are also needed for short-term purposes i.e. for day-to day requirement. We will

hardly finds that any business does not required any amount of working capital for its normal

operations. The requirements of working capital varies from firm to firm, its depending upon

the nature of the business like production policies, market conditions, season ability of

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operations, conditions of supplies etc. working capital used for procurement or raw material,

payment of wages to workmen and for meeting the routine expanses.

As we all know that only a successful sales progress can earn profit for the business but these

days credit system is [prevailing in the present competitive market. So the sales do not convert

into cash instantly. This system requires some times lag between sales of goods and receipt of

payment. So a need for short term funds in the form of current assets are required in lack of

immediate realization of cash against goods sold.

Another problem may arise if the finished good are in the stocks and within the given period it

could not be sold and some goods like raw materials, semi finished good are also in the stock

many funds blocked in different types of inventory. For the successful running of the business

requires sufficient amount of funds.

So the management of these funds or current assets is termed as working Capital Management.

It is the most vital ingredient of a business. Working Capital management if carried out

effectively, efficiently and consistently will assured the health of an organization.

MEANING

Working capital defined as the excess of current assets over current liabilities.

CURRENT ASSETS

Current assets are those assets which will be converted into cash within the current accounting

period of within the next year as a result of ordinary operations of the business.

Resources of current assets:-

Cash and bank Balance

Receivable

Period expanses

Short Term Advances

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Temporary investments

Cash is used for purchasing the raw materials, to pay wages and other manufacturing things.

After manufacture the product, finished goods puts in the stock-in-inventory and then goods willbe sold for the receivable accounts.

CURRENT LIABILITIES

Current liabilities are those debts of the firm that have to be paid during the current accounting

period or within a year. Current liabilities includes:-

Creditors for goods purchased

Outstanding expenses

Short term borrowing

Advance received against sales

Taxes and Dividends Payable

Other liabilities maturing within a year

Technically the requirements are working capital can be shown as operating cycle or cash cycle.

The operating cycle can be said to be at the heart of the need for working capital. Cash cycle

refers to the average time elapses between the acquisition of raw materials and the final cash

realization.

Basically operating cycle has four stages:-

1. The raw materials and store inventory stage

2. The work-in-progress stage

3. The finished goods inventory stage

4. Accounts receivable stage

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Operating cycle is useful mainly to ascertain the requirement of cash working capital to meet the

operating expenses of a going concern. In other words cash cycle refers to the length of time

necessary to complete the cycle of events.

Since cash inflows and cash outflows do not match, firms have to necessarily keep cash or invest

in short term liquid security so that they will be in position to meet obligation when they become

due. Similarly, firms must have an adequate inventory to guard against the possibility of not

being able to meet a demand for their product. Firm must sell goods to their customers on credit,

which necessitates the holding of accounts receivables. So it is very important to control over the

time of operating cycle i.e. the time to complete a cash cycle should not be longer because if the

cycle will longer the requirement of working capital will more.

So the cash cycle should be short. So for adequate level of working capital is absolutely

necessary for smooth sales activity which in terms enhance the owners wealth.

OPERATING CYCLE

Operating cycle is the time duration required to convert sales, after the conversion of resources

into inventories, into cash. The operating cycle of a manufacturing company involves three phases:

Acquisition of resources such as raw materials, labours, power and fuel, etc.

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Manufacture of the product which includes conversion of raw materials into work-in-progress into

finished goods.

Sale of the product either for cash or on credit. Credit sales create account receivable for collection.

OPERATING CYCLE:

Purchase of Raw

Materials

Collection of

Receivables

Issue of

materiialals to

Production and

incurring

losses

SALES

AccountsReceivables

Work-in-process

Finished Goods

Raw MaterialInventory

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The operating cycle is divided into two cycles-

Gross operating cycle

Net operating cycle

The length of the operating cycle of a manufacturing firm is the sum of:

(1) Inventory conversion period

(2) Debtors (receivables) conversion period

Gross operating cycle-

Inventory conversion period is the total time needed for producing and selling the product. It is the sum

total of raw material conversion period, work-inprocess conversion period and finished goods

conversion period. Raw material conversion period is the average time period taken to convert material

into work-in-process. Workin-process conversion period is the average time taken to complete the semi-

finished or work-in-process. Finished goods conversion period is the average time taken to complete the

semi-finished or work-in-process.

The debtors conversion period is the time required to collect the outstanding amount from the

customers.The total of inventory conversion period and debtors conversion period is referred to as gross

operating cycle.

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Net operating cycle-

A firm may acquire resource (such as raw material) on credit and temporarily postpone payment

of certain expenses. Payables, which the firm can defer, are spontaneous sources ofcapital to finance

investment in current assets. The creditors (payables) deferral period is the length of time the firm is

able to defer payments on various resource purchases. The difference between gross operating cycle and

payable deferral period is net operating cycle. If the depreciation is excluded from expenses in the

computation of operating cycle, the net operating cycle represents the cash conversion cycle. It is net

time interval between cash collection from sale of the product and cash payment for resources acquired

by the firm. It also represents the time interval over which additional funds, called working capital,

should be obtained in order to carry out the firms operations.

Operating cycle is useful mainly to ascertain the requirement of cash working capital to meet the

operating expenses of a going concern. In other words cash cycle refers to the length of time necessary to

complete the cycle of events. Since cash inflow and cash outflows do not match, firms have to

necessarily keep cash or invest in short term liquid security so that they will be in position to meet

obligation when they become due. Similarly, firms must have an adequate inventory to guard against the

possibility of not being able to meet a demand for their product. Firms must sell goods to their customeron credit, which necessitates the holding of accounts receivables. So it is very important to control over

the time of operating cycle i.e. the time to complete a cash cycle should not be longer because if the

cycle will be longer the requirement of working capital will be more. So the cash cycle should be short.

So for adequate level of working capital is absolutely necessary for smooth sales activity which in terms

enhance the owners wealth.

There are two concepts of working capital:

a) Gross Working Capital

The term Gross Working Capital referred to the firms investment in current assets.

b) Net Working Capital

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The term Net Working Capital can be defined into two ways:-

1. It is difference between current assets and current liabilities.

2. Net working Capital is that portion of firms assets which is financed with long term

funds. As we know that the task of financial manager is to managing the working capital

efficiently to ensure sufficient liquidity of any business firm is measured by its ability to

satisfy short term obligations as they become due.

THE NEED OF WORKING CAPITAL:

Any company can not neglect the need for working capital. The need for working capital arises due

to the time gap between the production and realization of cash from sales. The working capital is

needed for the following purpose:

1. For the purchase of raw materials, components and spares.

2. To pay wages and salaries.

3. To incur day-to-day expenses and overhead costs.

4. To meet the saving costs as packing, advertisement etc.

5. To provide credit facilities to the customers.

6. To maintain the inventory of raw material, work-in-progress, store and spares and finished goods.

Greater the size of the company generally lager will be the requirement of working capital theamount of working capital need a goes on increasing with the growth and expansion of the business

till it attains maturity. At maturity the amount of working capital is called the normal working

capital.

The necessity of maintaining adequate amount of working capital as follows:-

1. Solvency of the business

Adequate working capital helps in maintaining solvency of the business forms pay its debts on

time by working capital continuously. His will only possible if the working capital be adequate.

2. Goodwill

Sufficient working capital enables a company to create and maintain goodwill through prompt

payments.

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3. Easy Loans:A companys adequate working capital creates favorable and easy conditions to

arrange the loans.

4. Cash Discounts

Adequate working capital avail cash discount and reduces cost.

5. Regular supply of Raw Materials

Sufficient working capital regulates continuous production as it ensures regular supply of raw

materials.

6. Regular Payment of Salaries, Wages and others day-to-day commitments .

A company which ample working capital can make regular payments to its employees which in

turn raises the morale and their efficiency and reduces wastages and enhances production and

profit.

7. Exploitation of favorable market conditions.

Company having adequate working capital can exploit favorable conditions as purchasing its

requirements in bulk when the prices are lower and by holding its inventories for higher prices.

8. Ability to face prices

The crisis in emergencies like depression can be faced easily by company having adequate

working capital.

9. Quick and regular return on investment

Sufficiency of working capital enables a company to pay quick and regular dividend to its investor as

their may not be much pressure to plough back profits which creates a favorable market to raise

additional funds in the future.

10. High Morale

Adequacy of working capital creates an environment of security, confidence high morale creates

overall efficiency in a company.

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FACTOR, WHICH INFLUENCE THE NEED OF WORKING CAPITAL MANAGEMENT

There is no inventory universally applicable rule to ascertain working capital needs of a business

organization. The factors which influence the need level are as follows:-

1) Nature of Business

Any trading business major part of the fund used in the current assets, but in the transport

business, major part of fund would be locked up in fixed assets like motor vehicles, spares and

work shield etc. and the working capital would be negligible. So, requirement of working capital

depends upon the nature of business.

2) Size of the business / Scale of Operation

Size of the business also has an important impact on the need of the working capital. Size may be

measured in terms of the scale of operation.

If the size of the firm will larger the need of working capital will more than the small firm.

3) Production Policy

Production policy of a firm determines the need of working capital.

Because, if a product manufacture in both the cases i.e. in seasons or off seasons. The stock of

product will be more and in off seasons there is no demand of product the working capital

blocked in those products the fund of the forms.

4) Manufacturing process / Length of production Cycle

The length of production cycle or manufacturing process is also a influencing factor for the need

of working capital. Time span required for conversion of raw materials into finished goods is a

block period. More time in manufacturing the product required the more working capital. If there

are alternative ways of manufacturing a product, the process with the shortest manufacturing

cycle should be chosen.

5) Seasonal Variations

Seasonal variation affects the need of working capital. Seasonal products sold only in the season

like woolen cloths, seeds of mustard etc. In the season the demands of such products are very

high but in off-season the product becomes useless. But in the manufacturing company made in

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season as well as in off-season. In off seasons product will be stored in stock and blocked the

working capital. So, the production of product in these forms must be steady.

6) Credit Policy

Credit policy of the business organization includes to whom, when and to what extent credit may

be allowed. Amount of money locked upon in account receivable has its impact on working

capital.

7) Business Cycle

This factor determines the need level of working capital. There are variations in demand for

goods or services handled by any organization. Economic boom or recession etc. have their

influence on the transactions and consequently on the need of the working capital

8) Growth of Business

Working capital needs of the firm increase as its sales grow. The need for increased working

capital does not follow the growth of business operation but preceded it. So, necessary to make

advance planning of working capital for a growing firm on a continuous basis.

9) Environment

Political stability in its wake brings in stability in money market and trading world. Risk venture

are possible with enhanced needs for working capital finance.

10) Price Level Changes

Price level changes highly effective on the need of working capital. If the price level of the

product changes, the price of the product should be immediately revised. Some firms badly hit by

it, and some firms will not face serve working capital problem. So, the effect of price level will

different for different firm

SOURCES OF WORKING CAPITAL

Permanent or Fixed Temporary or Variable

Share Commercial Banks

Debenture Indigenous Bakers

Public Deposit Trade Credit

Ploughing Back of Profit Installment Credit

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Loans from Financial Instructions Advances

Accounts

Receivable Credit

The goal of working capital management is to manage the firms current assets and current liabilities

in such a way that a satisfactory level of working capital is likely to become insolvent and may even

be forced into bankruptcy. The current assets should be larger enough to cover its current liabilities in

order to ensure a reasonable margin of safety. Each of the short-term sources of financing must be

continuously managed to ensure that they are obtained and used on the best possible way.

BRIEF HIGHLIGHTS OF INVENTORY TO CURRENT ASSET, DEBTORS TO CURRENT

ASSETS, CASH & BANK TO CURRENT ASSENTS AND OTHER CURRENT ASSETS

INCLUDING LOAN & ADVANCES TO CURRENT ASSETS

1. Inventory to current assets:

Inventory is composed of a assets that will sold in future for the normal Course of business operation

.The assets which forms store as inventory in Anticipation of need are raw material, work-in-progress

and finished goods. The raw material inventory contain item that are purchased by the firm from others

and we convert it into finished goods through the manufacturing Process. They are normally partially

semi-finished goods that are at various Stages of production in a multi stage of production process.

Finished goods Represent final or concrete products, which are available for sales. The inventory of such

goods consists of terms that have been produced but are yet to be sold.

The basic responsibility of financial manger is to make sure that the firms Cash flow are managed

effectively, If efficient management of inventory should ultimately result in the maximization of the

owners wealth. In order to minimize cash requirement, inventory should be turned over as quickly aspossible, avoiding stock outs that might result in closing down the production line or lead to a loss of

sales.

2. Debtors of Current Assets

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The term receivable is defined as Debts owned to the firm by customer arising from sales of goods

or services in the ordinary course of business. When a firm makes ordinary sales of goods or

services and does not receive payments, the firm grants trade credit and creates account receivable

which would be collected in the future. Receivable management is also called Debtors Management.

Thus account receivable represents an extension of creditor to customer, allowing them a reasonable

period of time in which to pay for the goods which they have received. The block debt or receivable

arising out of credit has three characteristics:

1. It involves an element of risk, which should carefully be analyzed.

2. It is based on economic value.

3. It implies futurity.

The sale of goods on credit is an essential part of the modern competitive economic system. In

fact credits sales and therefore receivable are treated as marketing tool to add the sales of goods. The

credit sales are generally made on open account in he sense that there are no formal

acknowledgements of debt obligations through a financial; instruments. However extension of credit

involves risk and cost.

The objective of receivable management is to promotes sales and profit until hat point is reached

where the return on investment in future funding of receivable is less than the cost of funds raised to

finance that additional credit (i.e. Cost of Capital).

3. Cash and Bank to Current Asset

Cash management is a key area of working capital management. Apart from the fact that it is the

most liquid current assets, cash is the common denominator to which all current assets can bereduced because other major liquid asset that is receivable and inventory gate eventually converted

into cash. Thus underlines the significance of cash management.

The term cash with reference to cash management us used in two senses. In narrow sense it is used

broadly to cover currency and generally accepted equivalent to cash such as cheque, drafty and

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demand deposit in banks. Banks are the main institutional sources of working system finance. The

amount approved by the bank fir the firms working capital is called Credit Limit. The broader view

of cash also includes near cash assets, such as marketable securities and time deposit in banks. The

main characteristics of these are that then can be readily sold and converted into cash. They serve as

a reserve pool of liquidity that avoids cash quickly when needed. They also provides a short them

investment outlet for excess cash and are also useful for meeting planned outflow of funds.

The basic objectives of cash management are two fold:

a) To meet the cash disbursement needs (Payment Schedule)

b) To minimize funds committed to cash balances. These are conflicting and mutually contradictory

and the cash management is to reconcile them.

4) Loan and Advances to Current Assets

Loan and advances are also included in current assets. They include dues from employees or

associates, advances for current supplies and advances against acquisition of capital assets. Except

for advance payment for current supplies, it is not proper to include loans and advances in current

assets. Loans and advances are unsecured, considered goods unless otherwise stated. I help the

employees, companies etc. to fulfill their needs. Loan is provided by the IDBI, IFCI etc. banks.

Advances are income tax, custom & excise Duties etc.

IMPORTANCES OF WORKING CAPITAL MANAGEMENT

A firm may have to face he following adverse consequences from inadequate working capital.

1. Growth may be stunted. It may become difficult for the firm to undertake profitable

protects due to non-availability of funds.

2. Implementation of operating plans may become difficult and consequently firm profits

goals may not be achieved.

3. Operating inefficiency may creep in due to difficulties in meeting even day to day

commitment.

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4. Fix assets may not be efficiently utilized due to lack of working funds, thus lowering the

rate of return on investment in the process.

5. Attractive credit opportunities may have to be lost due o paucity of working capital.

6. The firm losses its reputation when it is not in a position to honor its short terms

obligation. As a result the firm is likely to face tight credit terms.

On the other hand excessive working capital may pose the following dangers:

1. Excess of working capital may result in unnecessary accumulation of inventories, increasing the

chances of inventory mishandling, waste and theft.

2. It may provide undue incentives for adopting too liberal a credit policy and slackening of

collection of receivable, causing a higher incidence of bad debts. This has an adverse effect on

profits.

3. Excessive working capital may make management complacent leading eventually to managerial

inefficiency.

4. If may encourage he tendency to accumulate inventories for making speculative profits, causing a

liberal dividend policy which becomes difficult to maintain when affirm is unable to make

speculative profit.

OBJECTIVE OF THE STUDY

The objective for which the study has been undertaken are as follows:-

To assess the significance of the working capital by selecting a few important parameters such as

working capital ratio, acid test, current assets to total assets ratio, current assets to sales ratio,

inventory to sales ratio, age of inventory and age of debtors.

To make an item wise analysis of the elements/ components of working capital to identify the items

responsible for changes in working capital.

To study the liquidity position of the company.

To get an insight of efficient asset management.

To study the past performance and to access its present financial strength.

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To get an insight into various sources of funds available for financing the working capital and its

utilisation.

SIGNIFICANCE OF THE STUDY

National Aluminium Company ltd. (NALCO) is considered to be turning point in the history of

Indian Aluminium Industry. Nalco has not only addressed the need for self-sufficiency in aluminium but

also given the country a technology edge, in producing this strategic metal on the best of the world

standards. Nalco has employed its foreign loan with its consistent track record in capacity utilisation,

technology absorption, and quality assurance, export performance and posting of profits, NALCO is a

bright example of Indias Industrial capability. Nalco became the only zero debt company in India by

1998. With this growth, there is a need to study the efficient management of working capital by NALCO.

The study will give a complete picture about the efficiency of financial activities in NALCO.

SOURCES OF DATA

The data at Nalco obtained for the study is divided into two parts-

(1) Primary data-

Primary data consists of information from the discussion with heads of department, officials and staff of

finance department of Nalco.

(2) Secondary data-

The data have been taken from secondary sources i.e. published annual reports of the company.

METHODOLGY OF THE STUDY

The data of National Aluminium Company Limited, for the years 2000 to 2008 used in this study

have been taken from secondary sources i.e. published annual reports of the company. Editing,

classification and tabulation of the financial data collected from the above mentioned source have

been done as per the requirements of the study. For assessing the performance of the working capital

management in this study the technique of the ratio has been used.

EXPECTED CONTRIBUTIONS FROM THE STUDY

To provide an insight into various sources available for financing the working capital and its

utilization.

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To provide a handy reference in understanding Nalcos financial policy and procedures.

To provide economic information to the investors and to judge the management on its

stewardship of the resources of the enterprise and achievement of corporate objectives.

To provide information about the economic activity of Nalco to several group who otherwise has

no access to such information.

TOOLS AND TECHNIQUES TO USE

1) Cash Flow Statement

A statement of changes in the financial position of firm on cash basis is called Cash Floe Statement.

Cash plays a very important role in the entire economic life of business. If a firm needs cash to

payment to tits suppliers, to incur day to day expenses and to pay salaries, wages, interest, dividend

etc. In fact what blood is to a human body cash is to business enterprises. Cash flow statement

enumerates net effects of various business transactions on cash and takes into account receipts and

disbursement of cash. A cash flow statement summarizes the causes of changes in cash position of a

business enterprise between two dales of balance sheet.

2) Funds Flow Statement

The funds flow statement which shows the movement of funds and is a report of a financial operation

of a business enterprise. It indicates the various means by which funds are obtained during a

particular period and the ways to which these funds were employed. Basically it is a statement of

sources and application of funds.

3) Ratio Analysis

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Ratio analysis is a very powerful analytical tool useful for measuring performance of an organization.

The ratio analysis concentrate on the interrelationship among the figures appearing in the above

mentioned four financial statements. The ratio analysis helps the management to analyze the past

performance of the firm and to make future projections. Ratio gives the business strengths/weakness

in two ways:-

Ratios provides an easy way to compare present performance with past

Ratio depict the area in which a particular business is competitive advantages

or disadvantages through comparing ratio to those of other business of the same

size within the same industry.

There are here basic measures of the firms overall liquidity are:-

i. The Current Assets Ratio

The current assets ratio measures the solvency of the company in the short term.

Current Assets, Loans & advances

Current Liabilities & Provisions

ii. Liquid Ratio

Liquid Assets ratio is also known as quick ratio, is used as a measure of the companys ability

to meet its current obligation.

Current Assets, Loans & advances - Inventories

Current Liabilities

iii. Working Capital Ratio

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Working Capital Ratio helps top measure the efficiency of the utilization of the working

capital. This ratio is computed by dividing working capital to sales.

Sales

Working Capital

LIMITATIONS

The study is limited to nine years (2002-2010)

The data used in this study have been taken from published annual reports only, hence

grouping or sub-grouping and naturalization of data may slightly affect the result. It is not

possible to collect primary data from the company office.

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CHAPTER-IV

ANALYSIS AND INTERPRETATION

FUNDS FLOW STATEMENT

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According to the working capital concept of funds, the flows of fund refer to the movement of

funds in the working capital. if any transaction results in the increase in working capital, it said to

be a source or inflow of funds and if it results in the decrees in the working capital, it is said to be

an application or outflow of funds

WORKING CAPITAL OF THREE CONSECUTIVE YEARS

(Rs. In Crores)

PARTICUL

ARS

07-08 08

-

09

09-10

A)Current Assets

B)Current Liabilities

3297.0

940.15

4974.08

1218.61

5041.33

1540.88

Working Capital (A-B) 2356.933755.47 3500.45

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STATEMENT FOR CHANGES IN WORKING CAPITAL 2008-09

(Rs. in Crores)

Particulars 2007-08 2008-09 Effect on Working Capital

Increase Decrease

Current assets

Inventories

Sundry Debtors

Cash & Bank Balances

Other Current Assets

Loan & Advances

Current Liabilities

Liabilities

Provisions

Working Capital

Net Increase in

Working Capital

590.78

29.42

2193.71

118.62

364.55

3297.08

607.33

332.82

940.15

2356.93

1398.54

3755.47

634.96

34.13

3686.53

212.04

406.42

4974.08

872.02

346.59

1218.61

3755.47

3755.47

44.18

4.71

1492.82

93.42

41.87

-

-

-

-

-

-

-

264.69

13.77

1398.54

The above table shows the changes in the working capital during the financial year 2008-

2009.We can easily make out that there is an surprising increase of Rs. 1398.54 crores in the working

capital of the firm for this particular period.

STATEMENT FOR CHANGES IN WORKING CAPITAL 2009-10

(Rs. in Crores)

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The above table shows the changes in the working capital during the financial year 2009-

2010.We can easily make out that there is an surprising decrease of Rs. 255.02 crores in the working

capital of the firm for this particular period.

The following table shows the net working capital of NALCO for the past nine years, i.e.,

from 2002-2010.

Particulars 2008-09 2009-10 Effect on Working Capital

Increase Decrease

Current assets

Inventories

Sundry Debtors

Cash & Bank Balances

Other Current Assets

Loan & Advances

Current Liabilities

Liabilities

Provisions

Working Capital

Net Decrease in

Working Capital

634.96

34.13

3686.53

212.04

406.42

686.65

60.65

3516.46

236.47

541.10

51.69

26.52

-

24.43

134.68

-

124.02

-

-

170.07

-

-

446.29

4974.08 5041.33

872.02

346.59

1318.31

222.57

1218.61 1540.88

3755.47 3500.45

255.02

3755.47 3755.47

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Year Current Assets

(Rs) ( In crores)

Current Liabilities

(Rs)( In crores)

Net Working Capital

(Rs) ( In crores)

2002 1011.01 493.02 517.992003 1048.15 805.01 243.14

2004 1138.45 719.20 419.25

2005 1006.50 1011.60 -5.1

2006 990.51 864.28 126.23

2007 1811.04 806.39 1004.65

2008 3297.88 940.15 2357.73

2009 4974.08 1218.61 3755..47

2010 5041.33 1540.88 3500.45

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RATIO ANALYSIS

This is the measure of inter relationship between different sections of the financial statements

which then is compared with the budgeted or forecasted results, prior year results and or the Industrial

results. To be most important ratios must include a study of underlying data. Ratios should be taken as

guides that are useful in evaluating a company's financial position and operations and makingcomparisons with results in previous years or with other companies. The primary purpose of ratios is to

point out areas needing further investigations. Ratios will not carry meaningful business reasoning if

there is no supporting quantitative and financial information. Apart from the ratios other information

which should be looked at includes:

1. The contents of any accompanying commentary on the accounts.

2. The age and nature of company's assets.

3. Current and future developments in the company's markets, at home and overseas, recent

acquisitions and disposals of a subsidiary by the company.

4. Extraordinary items in the income statements.

5. The auditor opinion on the financial statements.

6. Other information in the local papers about the company.

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As we know there are vast number of users of parties interested in analyzing the financial statements,

including shareholders, lenders, customers, government , employees and competitors. Yet in many

respect, they will be interested in different things. There is not, therefore, any definitive, all-

encompassing list of points for analysis that would be useful to all these stakeholder groups.

Ratio analysis is the first step in assessing an entity. It removes some of the mystique surrounding the

financial statements and makes it easier to pin point items which it would be interesting to investigate

further.

These ratios can ably be classified according to the target group of the stakeholders.

Profitability For shareholders, employees, creditors, investors, management.Liquidity For shareholders, management, suppliers, creditor and competitors.

Efficiency For management, shareholders, creditors and competitors.

Gearing For shareholders, lenders, creditor and potential investors.

Investment For shareholders, potential investors, management.

Category of Ratios

1. Profitability ratio

The objective of profitability relates to a company's ability to earn a satisfactory profit so that the

investors and shareholders will continue to provide capital to it. A company's profitability is linked to its

liquidity because earnings ultimately produce cash flow. For these reasons ratios are important to both

investors and shareholders.

When calculating profitability ratios we always use Profit on ordinary activities before taxation because

there might be unusual variations in the tax charge from year to year which would not affect the

underlying profitability of the company's operation.

Another important profit figure used should be the Profit before interest and tax (operating profit) which

represents the profit generated by the entity through its normal business operations.

a) Return On Capital Employed (ROCE)

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Adjusted Net Profit

= ___________________ X 100

Net Capital Employed

Interpretation:

Higher the ratio better it is. This ratio has also direct relationship among the net profit, total assets and

current liabilities.

2009-10 2008-09 2007-08 2006-07 2005-06

22.63 31.89 24.78 24 18.29

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In 2005-06 the ratio increase from 18.30 and after that the ratio has continuously increased from

24 to 31.89 because of decrease in current liabilities and increase in total assets and net profit. In 2009

the ratio has increased to a greater extent because the investment on capital work-in-process has been

reduced.. but in 2009-10 it came down to 22.63 because the net profit decreases and investment has

been done a lot .

b)Return On Shareholder Investment or Net worth:

Return on shareholders investment popularly known as ROI or return on share holder/

Proprietors funds is the relationship between net profit (after interest & tax) and the proprietor) fund

thus,

Return on Shareholders Investment =

Net Profit (after interest & tax

___________________ x100

Shareholders funds.

Shareholders Investment = Equity Share Capital + Preference Share Capital

+ Reserve & Surplus

(Accumulated losses if any)

Net Profit = Net Profits after payment of interest and tax.

This ratio is if great impor

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